HR services made up one-fifth of all outsourcing deals in 2014, and contracts are evolving from transactional HR to more sophisticated strategic talent management services. What’s behind this emerging trend? Dawn Nolan reports.
HR outsourcing has experienced an explosion in demand. HR services made up for one-fifth of all outsourcing deals in 2014, according to the UK Outsourcing Index.
The index, produced by business process outsourcing provider arvato, identified £126 million of HR outsourcing contracts in 2014, with private-sector organisations behind 90% of contracts signed.
According to Carol Haag, outsourcing specialist and managing consultant at PA Consulting Group, what’s driving this growth is an emerging appetite for ever more sophisticated HR services. Increased use of (and trust in) cloud-based HR systems is also fuelling demand.
She explains: “The changes in HR have been ramping up extremely rapidly over the last three years. With [HR software system] Workday exploding onto the market, it has driven the HRO providers to get to grips with cloud-based solutions as a base for delivering services, and this is really cutting a swathe through the HR solutions and outsourcing market.”
We’re now seeing evidence that UK organisations are increasingly entrusting more judgment-based processes, such as recruitment and talent management, to third parties.” – Sally Campbell, arvato UK.
She believes outsourcing providers are getting better at adapting to client needs, and supporting a far wider range of systems and technologies.
They have moved from capability in delivering services on ERP platforms, such as SAP and Oracle, towards the more flexible cloud-based platforms, as more global organisations seek the lower implementation costs associated with these systems.
Globalisation is driving innovation, too, as recruitment process outsourcing (RPO) providers are increasingly being expected to provide global or multi-geography solutions.
“Organisations want to be able to contract with one provider across the globe, so tapping into the different regional cultures and understanding how to attract and retain talent in different geographies is becoming increasingly important,” explains Haag.
“Global firms are looking for end-to-end solutions to manage contingent workers – a growing trend to address the non-standard employee commitment,” she adds. In addition, more sophisticated procurement teams are expecting more of their HR and workforce-related service providers.
She cites companies such as Agile-1, which provides both consultancy and contingent workforce management.
According to Sally Campbell, director at arvato UK, sophistication in HR outsourcing is being driven by a combination of factors: “HR is an increasingly strategic area of business, as many domestic industries struggle with a skills gap and growing competition from overseas.
“Organisations are alive to the fact that they can free up more of their team’s time to focus on business-critical tasks by outsourcing core services. In tandem, as the market has matured, suppliers have developed the expertise and sophisticated products and services to handle more complex activities.”
As such, HR outsourcing has moved up the value chain: “We’re now seeing evidence that UK organisations increasingly entrust more judgment-based processes, such as recruitment and talent management, to third parties,” Campbell explains.
Historically, outsourced HR services were “transactional” in nature, such as payroll or pensions administration.
Similarly, Haag refers to a trend in HR to make as many “tactical” savings as possible to the point where strategic savings are the next logical step.
“These are being realised through investment in full-scope HRO projects which include more than just core HR improvements in areas such as learning and development, specialist recruitment services (RPO), talent and performance management and monitoring,” she says.
In fact, talent management is, according to the index, the main driver of HR outsourcing – alongside increased standardisation in employee benefits administration.
More specifically, “predictive talent management” and “mitigative strategies to support organisations” are cited by Nick Kemsley, co-director of the Centre for HR Excellence at Henley Business School.
He describes a focus on “identifying pooling and latent talent pipelines” and “managing internal talent decisions – not just external – and managing that data”.
Case study: WSP UKSix years ago, professional services consulting firm WSP had a large contractor workforce employed by multiple agencies at varying costs. They were dealing with multiple invoices and time sheets, had no single source for management information and no control over contractual and HR issues relating to the workforce.
Head of recruitment Carol White researched a number of options: a WSP-managed preferred supplier list, vendor-neutral solutions and master-vendor solutions.
She decided master vendor was the best fit for WSP’s requirements and put the requirement out to competitive tender.
They selected recruitment specialist Matchtech on a five-year contract (just recently renewed for three years).
The solution would offer temporary support staff and technical contractor recruitment across all offices. Matchtech would provide candidate sourcing and screening under a service level agreement (SLA).
They would also manage all second-tier suppliers, introduce a single process to procure and pay contractors, and consolidate invoicing.
There have been numerous benefits. WSP can access a larger, more diverse pool of contractors thanks to Matchtech’s extensive database and the use of second-tier agencies; it is able to benefit from up-to-date analysis on market pay; contractor feedback is captured to ensure continuous improvement; and processes such as “time-sheeting” have become more efficient.
Crucially, the company has greater visibility over performance through the SLA.
White says: “All of the above has allowed the internal recruitment team to focus on permanent appointments through a direct-sourcing model, allowing us to get closer to the engineering talent pool and provide a quality experience throughout the process.”
Conversely, it is evident that there are HR teams that wish to regain control of some aspects, and Kemsley is quick to point out that “insourcing” is also on the up.
“Talent is such a strategic source of competitive advantage, organisations are cherry-picking and pulling back some strategic elements in-house, when they want more control over exec hires, for example.”
Haag argues that it is not always the buyers of HRO that are more sophisticated, but the service providers that are driving the market.
Knowledgeable HR operations managers are catching on to this, and Kemsley notes that some changes to their skill sets are needed to manage vendors more effectively.
Growing awareness of the market for HRO and the desire to push more high-touch HR activities out to suppliers is also driving this trend, says Haag.
There is more evidence of providers creating an outsourced team that operates as an extension of the organisation itself, such that end users would not see any difference between the internal or outsourced HR services.
This model has become something of a reality for engineering consultancy WSP UK, which has enjoyed numerous benefits from outsourcing its contractor recruitment.
“The master-vendor account manager for WSP UK is very much part of the internal recruitment team, attending our meetings, being present in our office locations and consulting the team on queries and as a point of escalation,” says Carol White, head of recruitment.
“Outsourcing does not mean that the recruitment team can relinquish all involvement; it has to be a team effort for this to be a seamless internal service managed by an external provider. You need to ensure you pick the right supplier as this is truly a strategic partnership.”
RPO on the rise
RPO is a good example of third parties being trusted with more strategic tasks. Notably, the arvato index points to a surge in inclusion of RPO within wider HR contracts – it was a feature of 50% of multi-service HR contracts in 2014, compared with 0% in 2013, when it was always procured separately.
“While RPO is not a new thing, it’s become a much more integrated part of the UK HR outsourcing landscape, with organisations increasingly commissioning it alongside more traditional, transactional services,” says Campbell.
“RPO can remove a lot of the labour-intensive work associated with recruitment, allowing internal HR resources to be redeployed into more strategic tasks like resourcing strategies or values and behaviour assessment processes.”
Haag makes it clear that, whereas RPO providers are specialists and can leverage sophisticated technology – for example, for social media purposes or application sifting, an in-house recruitment team may not be able to invest in their development to the same degree.
She warns that for employers using these services, the culture and brand messaging is critical, as is the use of social media, social networks and high-tech portals that support the candidate journey.
“Initial expectations from RPO are to bring in expertise to enhance or even replace the in-house capability and to save money. It is in its second, third and even fourth generation of contact renewal – the more embedded the RPO operation is, the higher the level of benefits achieved.”
So what does the future hold for HR outsourcing? Haag’s vision is that the sophistication and innovation will only increase.
She predicts that RPO will become more targeted, and adapt its attraction approach to be faster and more efficient – for example, through greater use of apps and online channels. “RPO providers will make it easier and quicker to access job portals, apply and be interviewed and get onto the onboarding process,” Haag advises.
Closer working between vendors and clients develop over time but the quicker these are established, the sooner the organisational benefits will be realised, she says.
Campbell anticipates that “growing trust in third-party suppliers, triggered by the successful delivery of more sophisticated HR services such as RPO, is likely to lead to an increasing number of organisations outsourcing more of their strategic HR activities”.
The market is also growing – evidenced by the number of brand new agreements highlighted by the arvato index – 77% of the HR contracts signed last year were new deals, where the function has been outsourced for the first time.
Kemsley warns that providers will have to become more flexible and cope with a more “hybridised” model of outsourcing: “The challenge is to have flexible models and increasingly tailored provision to meet organisations’ needs but remain cost competitive.”
He concludes that “outsourcing will continue to be a very important strategic tool in balancing quality and cost effectiveness in resourcing”, but urges organisations to really think through how it will provide the benefits they want “to avoid the random, knee-jerk reaction to outsourcing we saw 10 years ago”.